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What is underapplied or overapplied manufacturing overhead?

Simpson Inc. uses a predetermined overhead rate based on direct labor hours to apply manufacturing overhead to its various jobs. At the beginning of the year, the company estimated manufacturing overhead would be $400,000 and direct labor hours would be 40,000. The actual figures for the year were $430,000 for manufacturing overhead and 42,000 direct labor hours. Is manufacturing overhead underapplied or overapplied for the year? By how much?

First, calculate the predetermined overhead rate (based on direct labor hours (DLH)) as follows.
Predetermined overhead rate = Estimated overhead costs ¸ Estimated direct labor hours
Predetermined overhead rate = $400,000 ¸ 40,000 direct labor hours = $10.00 per DLH
Then, determine the amount of manufacturing overhead applied during the period:
Overhead applied = Predetermined overhead rate x Actual direct labor hours
Overhead applied = $10.00/direct labor hour x 42,000 direct labor hours = $420,000
Finally, compare the actual manufacturing overhead costs to the amount applied and decide whether it is underapplied or overapplied:

Actual
$430,000
Applied
  420,000
Balance (underapplied)
$  10,000
 
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